How much can you afford to pay for a house? Bankrate's home affordability calculator can give you a solid answer to that question.
Mortgage lenders calculate affordability based on your personal information, including income, debt expenses and size of down payment. The mortgage calculator uses similar criteria.
Here are some of the factors that lenders consider.
Lenders will calculate how much of your monthly income goes toward debt payments. This calculation is called a debt-to-income ratio.
Percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Debt payments / income
For example: Jessie and Pat together earn $10,000 a month. Their total debt payments are $3,800 a month. Their debt-to-income ratio is 38 percent.
$3,800 / $10,000 = 0.38
A standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28 percent of your income before taxes. This debt-to-income ratio is called the "housing ratio" or "front-end ratio."
Lenders also calculate the "back-end ratio." It includes all debt commitments, including car loan, student loan and minimum credit card payments, together with your house payment. Lenders prefer a
back-end ratio of 36 percent or less.
Ratios aren't carved in stone
Those recommended ratios (28 percent front-end and 36 percent back-end) aren't ironclad. In many cases, lenders approve applicants with higher debt-to-income ratios. Under the "qualified mortgage rule," federal regulations give legal protection to well-documented mortgages with back-end ratios (all debts, including house payments) up to 43 percent.
"That's been one of the bigger drivers (of affordability) because that is basically drawing a box around what's a qualified mortgage," says Tim Skinner, home lending sales and service manager for Huntington Bank in Columbus, Ohio. "A large portion of the lending community has decided to stay in that box."
If you have a good credit history, you are likely to get a lower interest rate, which means you could take on a bigger loan. The best rates tend to go to borrowers with credit scores of 740 or higher.
With a larger down payment, you will likely need to take on a smaller loan and can afford to buy a higher-priced house.
Money from your savings that you give to the home's seller. A mortgage pays the rest of the purchase price. It's usually expressed as a percentage: On a $100,000 home, a $13,000 down payment would be 13 percent.